Income investors continue to find 15% and up yields in the mortgage backed securities (MBS) sector. The winners are shining with increasing book values per share. In addition, the dividends have continued to provide outsized returns for investors willing to risk investing in this sector. In this article I will discuss one C Corporation and 4 mortgage backed security entities. All 5 names possess 15% and up dividend yields.
Arlington Asset is a Virginia corporation and taxed as a C corporation for U.S. federal tax purposes. The company's previous name was Friedman, Billings, Ramsey Group.
Arlington Asset Investment Corporation (AI), is a publicly traded company engaged in leveraged basis investments mainly on residential MBS. These include collateralized mortgage obligations (CMOs) issued by or guaranteed as to principal and interest by a U.S. Government agency. Arlington Asset also invest in non agency MBS, which are not guaranteed by the U.S. Federal Government.
Here is a MBS position sheet as of December 31st, 2011:
The December 31st, 2011 book value per share was $23.67. The fourth quarter dividend was 87.5 cents per share, equating to an annual 15% yield. The company did pay a 87.5 cent dividend for the first quarter of 2012.
Arlington Asset Investment is led by Eric F. Billings, Chairman and Chief Executive Officer. Mr. Billings is one of the co founders of the company. The company was established in 1989.The Company's principal investing unit, FBR Asset Investment Corp., was established in 1997. Mr. Billings is also the Chairman of FBR Asset Investment Corp.
The company had a solid fourth quarter. The 18.7% return on equity from core operating income in the fourth quarter was due to improved returns on deep discount private label MBS, in addition to the continued low interest rate environment.
A look at the current stock performance of Arlington Assets Investments reveals that their current shares are trading at $22.49. During the past 52 weeks, shares have been trading at a high of $32.63 and a low of $19.00. The current price reflects a 5% discount to book value per share. The first quarter numbers are expected to be released on April 19th.
CYS Investments (CYS)
CYS Investment announced impressive numbers on April 18th. Book value per share inched up to $13.14. The stock is trading at an attractive price to book value.
CYS Investments is an agency mortgage real estate investment trust (mREIT). The 4th quarter book value per share was $13.02. The leverage remained constant at 7.7x.
Apollo Residential Mortgage, Inc. (AMTG)
Apollo Residential Mortgage has provided shareholders an interesting week. The company announced on April 16th a secondary. Apollo Residential Mortgage began a public secondary offering for 13,900,000 shares of common stock. In addition, management gave underwriters a 30 day option to purchase up to 2,085,000 additional shares of common stock.
The markets are still digesting the offering size. This more than doubled the size of the mREIT. Apollo Residential Mortgage is a hybrid mREIT and owns both agency and non agency MBS. The company's 4th quarter book value per share was $19.92.
Apollo Residential Mortgage had, prior to the secondary, a sub $200 million market cap. This secondary provides access to new funds for MBS purchases. The mREIT has similar operating costs to compete against the mREIT industry leaders. This offering will reduce the operating expenses and be beneficial in the long run.
American Capital Agency Corp. (AGNC)
American Capital Agency continues to dominate the mREIT space in terms of net returns. Gary Kain is adamant about maintaining the book value per share. He has followed through on his word in delivering outstanding returns to investors.
Per the above table, American Capital Agency offers income investors a 16.5% dividend yield. The 4th quarter book value was $27.71. American Capital Agency closed, on April 18th, at $30.52. This represents a 10% premium to the 4th quarter's book value per share. Investors are well advised to buy mREITs at prices close to book value per share. In the coming weeks, we will learn the current book value per share. I recommend investors wait until that point prior to purchasing additional American Capital Agency shares.
American Capital Mortgage Investment (MTGE)
Gary Kain manages the agency MBS for American Capital Mortgage Investment. American Capital Mortgage Investment had a successful secondary offering on March 14th. American Capital Mortgage Investment is a hybrid mREIT which owns both agency MBS and non agency MBS.
The American Capital Mortgage Investment's 4th quarter book value per share was $20.87. The stock is presently trading at $21.80. This represents a 4.4% premium to the 4th quarter book value per share. Based upon the mREIT fundamentals and Gary Kain's involvement, I recommend investors purchase American Capital Mortgage Investment. I believe an increase in 1st quarter book value per share will be a pleasant surprise. The stock currently yields 16.4%.